Nikon (NINOY) Q3 Revenues Decrease Y/Y, Forecast Raised

Nikon Corporation’s NINOY third-quarter fiscal 2018 earnings increased significantly over the comparable quarter last fiscal, as the company generated a net profit of ¥8.4 billion ($74.3 million) against a loss of ¥7.9 billion last year.

Operating income for the fiscal third quarter came in at ¥18.4 billion ($162.8 million), versus an operating loss of ¥8.6 billion in the year ago quarter.

For the first nine months of the fiscal, net profit attributable to owners increased 57% to ¥22.3 billion ($199.1 million) compared with year-ago quarter. Earnings per share for the first nine months of the fiscal improved 56.6% year over year.

Further, operating income increased 123.1% year over year to ¥41.4 billion, supported by strong performance in the Precision Equipment and Imaging Products businesses.

Inside the Headlines

In the quarter, Nikon’s net sales decreased 11.5% year over year to ¥196.8 billion ($1.74 billion). The top line was negatively impacted by decline of sales volume of digital camera-interchangeable lens type, compact digital cameras as well as FPD lithography systems.

Nikon Corp. Price, Consensus and EPS Surprise

For the first nine months of the fiscal, net sales fell 7.2% to ¥525.2 billion ($4.69 billion), due to negative growth in Imaging Products Business as well as in Precision Equipment Business, year over year.

For the quarter, sales for the Precision Equipment Business recorded a decline of 33.6% year over year to ¥48.1 billion ($425.7 million). Revenues were offset by decline in sales volume of FPD lithography systems. Operating income at the segment rose to ¥8.4 billion, against an operating loss of ¥10.6 billion in the prior-year period. Operating income for the segment increased significantly on the back of improved performance in the semiconductor lithography system field.

The Imaging Products Business witnessed a decline in sales as the top line shrunk 5.3% year over year to ¥116 billion ($1.03 billion). However, operating profit recorded an increase of 95.2% to ¥16.2 billion compared with ¥8.3 billion in the prior-year period. The unit’s operating profit improved on account of favorable response to the D850, a digital SLR camera in the market.

Sales for the Healthcare Business recorded an increase of 6.1% year over year to ¥14 billion ($123.9 million). The units’ revenues were driven by impressive sales of ultra-wide field retinal imaging device in Europe and the United States. The segment recorded an operating loss of ¥1 billion, wider than the loss of ¥0.7 billion in the prior-year period. The figure was dragged by upfront investments in new businesses.

The Industrial Metrology and Others delivered sales of ¥18.7 billion ($166.4 million) in the quarter, up from sales of ¥14.2 billion recorded in the year-ago period. This segment also recorded an operating profit of ¥1.6 billion, higher than the profit of ¥1 billion in the prior-year period.

Liquidity & Cash Flow

As of Dec 31, 2017, Nikon’s cash and cash equivalents were ¥386.7 billion ($3.4 billion), up from ¥316.7 billion recorded a year ago.

Total liabilities as of Dec 31, 2017, came out to be ¥557 billion ($4.9 billion), up from ¥480.2 billion as of Mar 31, 2017.

Guidance

Concurrent with its earnings release, Nikon raised the guidance for fiscal 2018. The company now expects net sales to come at around ¥720 billion, up from previous forecast of ¥710 billion. The company anticipates sales and profit in the Imaging Products Business to be stronger than previously expected.

Precision Equipment business profit is anticipated to rise in both FPD lithography system field as well as semiconductor lithography system field. However, in the Industrial Metrology and Others profit is expected to decline due to high restructuring expenses. This apart, the company raised forecast for operating profits, from ¥45 billion to ¥53 billion.

Restructuring Plan & Business Segments

Earlier, Nikon unveiled a plan to undertake company-wide structural reform, as it seeks to enhance operational profitability and create value.

The restructuring was prompted by the fact that Nikon has not been able to derive value from its existing businesses. The company’s Imaging Product business has been grappling with foreign exchange headwinds.

In light of the above scenario, Nikon planned to discontinue the current "Medium-Term Management Plan Update." Instead, it has initiated a company-wide restructuring to help shift to a strategy which pursues profit growth instead of revenue growth.

The plan includes reassessment of the strategy of the Semiconductor Lithography and Imaging Product Businesses. Additionally, Nikon intends to optimize manufacturing, sales and R&D on a global basis along with streamlining and optimizing workforce. As part of the initiative, Nikon stated it will be declaring a voluntary retirement program for about 1,000 employees.

Further, Nikon restructured its business segments during the fiscal second quarter. The company integrated two of its business units, Microscope Solutions BU and Medical Business Development Division into Healthcare BU, which falls under a separate, new segment named the Healthcare Business. Also, the Industrial Metrology BU was reclassified under the new Industrial Metrology and Others segment, along with Customized Products BU, Glass BU, and Encoder BU.

The business structure was reorganized to facilitate collaboration and streamline operations.

Our Take

Nikon remains bullish on its Healthcare business along with Industrial Metrology and Others businesses. It expects these segments to act as strong growth drivers, going forward. The reorganized business structure is likely to facilitate collaboration as well as streamline operations.

However, poor performance from Imaging Products business and Precision Equipment business remain headwinds. Also, high R&D expenditure and investments related to the medical business are escalating operational costs, consequently putting pressure on margins.

Aspen Technology has an excellent earnings surprise history, surpassing estimates in the trailing four quarters, with an average beat of 33.7%.

Applied Materials also boasts a decent earnings surprise history, exceeding estimates in the trailing four quarters, with an average beat of 2.8%.

MKS Instruments has posted earnings beat thrice in the trailing four quarters, for an average beat of 7.5%.

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